FINANCIAL RESPONSIBILITY RULES FOR BROKER-DEALERS

General

(New) Investment Company Liquidity Disclosure

The SEC adopted amendments to its forms designed to improve the reporting and disclosure of liquidity information by registered open-end investment companies. The SEC adopted a new requirement that funds disclose information about the operation and effectiveness of their liquidity risk management program in their reports to shareholders. The SEC in turn is rescinding the requirement in Form N-PORT under the Investment Company Act of 1940 that funds publicly disclose aggregate liquidity classification information about their portfolios. In addition, the Commission is adopting amendments to Form N-PORT that will allow funds classifying the liquidity of their investments pursuant to their liquidity risk management programs required by rule 22e-4 under the Investment Company Act of 1940 to report multiple liquidity classification categories for a single position under specified circumstances. The Commission also is adding a new requirement to Form N-PORT that funds and other registrants report their holdings of cash and cash equivalents.

Securities Exchange Commission, Release No. IC-33142 (June 28, 2018), 83 FR 31859 (July 10, 2018): Investment Company Liquidity Disclosure

 

SEC Financial Responsibility Rules

The SEC staff communicates and issues oral and written interpretations to the financial responsibility and operational rules, which FINRA publishes on the Interpretations of Financial and Operational Rules page on the FINRA website. FINRA has published a number of Regulatory Notices announcing updates to the interpretations to reflect the addition, revision or rescission of specified interpretations, including among other things updates to reflect the effectiveness of the new rule amendments.

FINRA Regulatory Notice 18-03 (January 10, 2018): FINRA Announces Updates of the Interpretations of Financial and Operational Rules

 

Liquidity Risk Management Practices

Effective liquidity management is a critical control function at broker-dealers and across firms in the financial sector. Failure to manage liquidity has contributed to both individual firm failures and, when widespread, systemic crises. From an investor protection perspective, sound liquidity risk management practices enhance investor protection because they make it more likely that a firm’s customers continue to have prompt access to their assets, even in times of stress.

FINRA is providing guidance on effective practices that senior management and risk managers at firms should consider and implement. Regulatory Notice 15-33 is directed to firms that hold inventory positions or clear and carry customer transactions. Other types of broker-dealers may also find the Notice is of value to them when assessing their own liquidity risks.

FINRA Regulatory Notice 15-33 (September 2015):  Guidance on Liquidity Risk Management Practices